Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

Aided by a favorable starting position, independent Slovenia took an early lead among
Central and East European transition countries in stabilizing and transforming its economy:
by 1996, inflation had been lowered to single digits, per capita income had returned to its
pre-independence level, and the international reserves position had become very
comfortable. After moderating from 5.3 percent in 1994 to 4.1 percent in 1995, real GDP
growth slowed further to 3.1 percent in 1996. As in 1995, domestic demand was the driving
force behind the expansion in 1996, but with a clear slowdown in the growth of private
consumption and investment. During 1997 real GDP growth is estimated to have risen to
3.7 percent, mostly reflecting the recovery abroad. The rate of inflation has remained stuck
in the 7-11 percent range since August 1995, reflecting the combined effect of nominal
effective depreciation, price adjustments for petroleum products and electricity, and wage
pressure.

Real wages continued to grow strongly in 1996 and early 1997 as nominal wage growth
exceeded the guidelines of the social agreement between business, government, and labor.
In the absence of a new social agreement for 1997, a freeze on wages of civil servants and
a lower degree of indexation restrained wages for the rest of the year. In 1996 the (RPI
based) real effective exchange rate depreciated for the first time since 1992 as a large
reduction in social security contributions reduced unit labor costs and the tolar weakened in
nominal effective terms. After reversing itself in the first half of 1997, real effective
depreciation resumed in the second half as the U.S. dollar continued to strengthened. All
real exchange rate indicators point to a relatively modest appreciation of some 5-10 percent
since 1993.

A small current account surplus and large capital inflows led to a record balance of
payments surplus in 1996. A strong deterioration of the current account in early 1997--in
part reflecting imports that had been deferred to take advantage of customs tariff
reductions--is expected to have been largely reversed by year-end as merchandise exports
responded to recovery in the EU. Moreover, the exports of services, especially tourism and
transport, continued to grow. With the current account in approximate balance, continued
capital inflows, including official borrowing and stable inward direct investment of
approximately 1 percent of GDP, are projected to have raised the reserve cover to more
than 5 months of imports.

The persistent capital inflows have posed a serious dilemma for monetary policy. In an effort
to reduce stubborn inflation while maintaining competitiveness, the Bank of Slovenia
continued to control base money, while staving off mounting currency appreciation pressure
through capital inflow restrictions and sterilized intervention. High domestic interest rates and
greater selectivity on the part of banks restrained the growth of credit in 1997, thus creating
some room for outright intervention. Domestic interest rates, although falling gradually, have
remained high in real terms, reflecting their backward indexation, capital inflow restrictions,
and lack of competition among banks.

A small surplus on general government operations was recorded in 1996, thanks to buoyant
tax collections and tight expenditure control. A larger central government surplus provided
the resources to finance large reductions in pension contribution rates during the year and
offset the rapidly rising deficit of the pension fund. While expenditure was controlled tightly in
1997 until the budget was finally approved in December, the general government finances
have come under increasing pressure, mainly reflecting 1996 wage concessions, the full-year
effect of the lower pension contributions, growth in social transfers, and further customs
tariff reductions in connection with the EU accession and CEFTA agreements.
Notwithstanding that some spending in early 1998 will be included in the 1997 budget, tight
budget execution during most of 1997 makes it likely that the overall deficit will be slightly
lower than the 1.5 percent of GDP envisaged in the recently approved general government
budget.

The transformation to an economy based on private ownership of the means of production
continues to make progress: the private sector now accounts for more than one half of value
added and employment. The privatization of socially owned enterprises is nearing
completion, but privatization of state-owned enterprises has yet to begin. Following their
financial rehabilitation, the privatization of the two large state banks (and that of other state
assets) still awaits approval of enabling legislation. Other unapproved legislation includes
banking, foreign exchange, privatization of state assets, institutional reform of public service
providers, public sector accounting, civil service reform, major taxes, and the pension
system.

Executive Board Assessment

Executive Directors noted that tight macroeconomic policies and basic structural reforms in
the years following independence had allowed Slovenia to make rapid progress toward
stabilization, resume economic growth, and to improve the prospects for early EU
membership. However, recent delays in structural reforms and a weakening fiscal situation
threatened to impede further progress on reducing inflation and maintaining growth.
Directors therefore urged the authorities to seize the opportunity offered by the favorable
external environment to reduce inflation further, to make the economy more efficient and
flexible, and to enhance its growth potential. In this respect, they considered that vigorous
implementation of structural reforms and the rebalancing of the policy mix toward tighter
fiscal and incomes policies and away from overreliance on restrictive monetary policy were
crucial. Several Directors also noted that confidence in macroeconomic policy making could
be improved by better policy coordination, greater transparency of policies, and
administrative and regulatory reform. A few Directors further emphasized the desirability of
improving governance as it relates to economic management.

Directors viewed the emergence of a fiscal deficit in 1997 and the potential of its future
widening with concern. They stressed therefore that, in line with their underlying objective of
overall fiscal balance, the authorities should push for the early adoption of a balanced
budget for 1998 and should adopt a credible plan to reduce the relative size of government
in the economy. Directors suggested that fiscal adjustment be largely expenditure-based.
Priority should be given to measures to rein in the growth of spending on wages, social
transfers, and pensions. The authorities should also examine ways to deliver public services
more efficiently, through contracting out and privatization, for instance. Directors broadly
endorsed the authorities' tax and pension reform plans and urged the early introduction of a
value-added tax at a uniform rate.

The recent adoption of an annual monetary program was welcomed as an important step
toward greater transparency and accountability in monetary policy. The Bank of Slovenia
should be unequivocal in its commitment to sustained disinflation as its principal objective
and assume responsibility for setting the inflation objective. Directors noted that monetary
policy had been complicated by heavy capital inflows induced by high domestic interest
rates. They stressed the importance of early action to remove the financial market distortions
that kept domestic interest at a large premium. The chief actions required were deindexation
of financial contracts, increased competition between banks, disallowance of the interest rate
agreement among banks, and opening up to foreign bank branching. Several Directors also
were of the view that, as pressure from capital inflows subsides with the decline in interest
rates, the authorities should proceed with a gradual dismantling of restrictions on inflows. A
few Directors cautioned against any premature dismantling of capital restrictions, noting that
this should be undertaken only after the financial sector had been strengthened.

Pointing to the tendency for the real exchange rate to appreciate in the transition process,
Directors considered that some nominal appreciation seemed appropriate in the period
ahead to promote disinflation. Directors cautioned the authorities about making premature
commitments about price and nominal exchange rate stability, while the transition process
remained incomplete and the conditions for a successful peg had not yet been established.

Directors welcomed the recent progress on tightening incomes policy and stressed the
importance of keeping a tight rein on government wages and encouraging decentralized
wage bargaining and result-oriented compensation in the nongovernment sector.
Underscoring the importance of structural reform for sustainable growth and disinflation,
Directors urged the authorities to move quickly to reinvigorate their stalled reform process.
Progress was needed on many fronts to promote deindexation and price liberalization;
strengthen corporate governance; privatize remaining socially-owned enterprises and state
assets; make the labor market more flexible; and develop financial markets. In this context,
the authorities were urged to do their utmost to help break the backlog of reform legislation.
These measures would also improve the climate for foreign direct investment.

Directors welcomed progress in strengthening banking supervision and in the financial
condition of banks, but noted that further improvement in the supervision of the financial
sector was needed. Directors called for the speedy introduction of a comprehensive set of
financial market legislation and encouraged the government to divest itself of its share in two
rehabilitated banks and foster consolidation by mergers and acquisitions.

Slovenia: Selected Economic Indicators

1993

1994

1995

1996

Proj.1997

In percent

Real Economy

Real GDP

-2.8

5.3

4.1

3.1

3.7

Domestic demand

13.3

5.6

11.0

3.2

3.6

RPI (end of period)

22.9

18.3

8.6

8.8

9.7

Unemployment rate

14.4

14.4

13.9

13.9

14.3

Gross national saving (in percent of GDP)

20.6

24.5

23.2

24.0

24.1

Gross domestic investment (in percent of GDP)

19.3

20.6

23.2

23.4

24.0

Public Finance (percent of GDP)

Central government balance

1.3

2.5

3

4.5

4

General government balance

0.3

-0.2

0

0.3

-1.5

Public debt

21.1

18.6

18.8

23.2

23.5

Money and Credit ( end of year)1

Real credit to the private
sector

8.7

11.6

32.4

8.4

1.1

M3

63.7

42.4

27.9

21.4

22.3

Interest Rates (percent)1

Nominal interbank interest rate (overnight)

38.5

28.7

12

13.8

10.4

Real lending rate

19-20

16-17

13-14

11-12

10

Real deposit rates

8-11

8-11

7-10

5-7

3.7

Balance of Payments

Trade balance (percent of GDP)

-1.2

-2.3

-5.1

-4.7

-4.7

Current account balance (percent of GDP)

1.5

4.2

-0.1

0.2

-0.1

Banking system reserves
(US$million)

1566

2764

3426

4096

4637

Reserve cover (months of imports of
GNFS)

2.6

4

3.8

4.6

5.2

Fund Position (percent of quota)

Holdings of currency

137.6

Holdings of SDRs

0.27

Quota (SDR millions)

150.5

Exchange Rates

Exchange rate regime

Managed float

Present rate (December 15,
1997)

SIT 166.67 per US$1

Nominal effective
exchange rate (1993=100)1

100

87.9

88.6

79.4

75.3

Real effective exchange
rate (1993=100)1, 2

100

102.8

113.8

109.3

109.8

11997 figures are as of end-September 1997.2RPI based.

1Under Article IV of the IMF's Articles of Agreement,
the IMF holds bilateral discussions with members, usually every year. A staff team visits the
country, collects economic and financial information, and discusses with officials the
country's economic developments and policies. On return to headquarters, the staff prepares a
report, which forms the basis for discussion by the Executive Board. At the conclusion of the
discussion, the Managing Director, as Chairman of the Board, summarizes the views of
Executive Directors, and this summary is transmitted to the country's authorities. In this PIN,
the main features of the Board's discussion are described.